ISEC - HPCL, Britannia, Tata Tea

ISEC on HPCL

HPCL’s Q4FY07 recurring net income at Rs5.5bn against Rs2.2bn in Q4FY06 was slightly above our expectations (Rs5.4bn). This was despite higher-than-expected subsidy sharing by upstream companies and the Government. This is primarily due to 82% QoQ increase in other expenditure and lower-than-expected Q4FY07 refining margins. HPCL’s reported net income fell 72.7% YoY to Rs5.5bn as FY06 oil bonds were issued and accounted in Q4FY06 results. The stock fell 10.7% YoY and underperformed the Sensex 45.2% YoY. We remain positive on the stock on the back of a robust margin outlook, favourable Government under-recovery sharing and proposed reforms on CST/octroi.

HPCL seems attractive on current valuations, given the robust outlook on refining margins and a benign Government policy on under-recovery sharing. Proposed reforms on CST, octroi and a possible fuel price increase post the
Uttar Pradesh elections would provide further impetus. The stock is currently trading at FY08E P/E of 7.1x and EV/EBITDA of 3.7x and has underperformed the Sensex by
45.2% YoY. Potential news on LPG/SKO, subsidy reforms and new E&P finds could
add further upside. We reiterate BUY on HPCL with a 12-month fair value of Rs424-
451/share.

ISEC on Britannia

Britannia’s Q4FY07 performance was ahead of our expectations; sales growth accelerated to a new high of 32% YoY despite a high base. Operating margins before ad spends expanded 419bps QoQ to 13.9%, notwithstanding the sustained inflationary pressure from input prices. With the enhanced excise exemptions up to Rs100/kg by the Budget, excise exemption benefit for 75-80% of Britannia’s portfolio would be reflected Q1FY08 onwards. We believe the worst is over for Britannia and expect 40% earnings CAGR through FY07-09E. Despite the recent run up, maintain BUY.

Maintain BUY. With the entire benefit of price hikes and excise exemption reflected Q1FY08 onwards, we expect Britannia’s profitability to boost significantly. We believe the worst is over for Britannia and expect 40% earnings CAGR through FY07-09E. The company has emerged stronger post past two years of intense cost & competitive pressures and is well positioned to capture growth in the fast-growing processed foods business. Despite the recent run up, we maintain BUY on the stock, which is trading at FY08E P/E of 23x.

ISEC on Tata Tea

With the entire adverse impact of the Glaceau acquisition being reflected in H2FY07 and the stock having significantly underperformed, this would be an opportune time to BUY from a long-term perspective.